Manufacturing Sector Getting, Setting, And Going

As reported, besides higher level of confidence in overall economy, Indian business owners are most optimistic globally about growth of their business turnover. This is according to an International Business Report (IBR) survey published last week by Grant Thornton International.

For the past two years, growth in manufacturing sector production was 9.1%.
The Index of Industrial Production (IIP) figures released by the government last week show that growth was primarily driven by manufacturing, which soared 15.7% in November. This is a great news.

According to the central bank, exports of India’s manufactured engineering goods grew at an average annual rate of 33.8% during the most recent three years and 40% of these exports were manufactured by small- and medium- size enterprises.

Though manufacturing forms only 17% of India’s GDP, it contributes 75% to exports, and accounts for over 50% of FDI, while employing 11% of the workforce, generates $450 billion worth of output.

India needs to create 8 Million jobs every year incrementally to sustain even current rate of unemployment. Manufacturing only is the right cure for the teeming millions of Indian unemployed youths going to join the workforce. Manufacturing is a force-multiplier, as every rupee of investment increases GDP by Rs 4.

Indian manufacturing must grow at 12-14% if India is to maintain an 8-9% per annum GDP growth rate over the next decade. And the growth rate of 12% in manufacturing can create about 1.6-2.9 million direct jobs annually in addition to two-to-three times this number of new jobs indirectly.

As per one estimate, poor infrastructure adds 3-6% to the Indian manufacturer’s cost of doing business even as there is a gain of 4-5% on account of better engineering skills and R&D of the country.

According to McKinsey, it is possible for Fortune 500 company to manufacture products in India at about 70% of the cost of a similar product in the US. Tata Motors’ ‘Indica’ costs about 40% less than what a comparable car developed in the West would have cost.

According to McKinsey estimates, half of all global offshoring by US companies already involves skill-intensive sectors. By 2015, the figure may go up to 70%. India can emerge as one of the three largest exporters among Low Cost Countries with skill-intensive manufacturing exports of $250-300 billion and can create an additional 25-30 million jobs.

But India is to compete with China. As per an automotive industry estimate (three years ago), the cost differential between India and China was 22-24%. Nearly two-thirds of this was because of interest rates and the cascading impact of taxation, while the balance was due to logistics issue and rigid labour market.

Implementation of VAT, Value Added Tax, once completed in all states of India is expected to reduce the cost differential between India and China to a more manageable 5-6%. Why should India go on perpetuating a system where it appears as if each state is a country with separate sets of taxations?

India must also go for less high-tech and more labour-intensive manufacturing segments. On an average, it takes six parsons in the small industry to do the job of one person in the corporate (big industry) setup. So a judicious approach is necessary to encourage the growth of SMEs, while maintaining the competitiveness with the large scale manufacturing companies.

India can no longer expect to compete and play a big role in global trade without a substantial growth of its manufacturing sectors of all hues- low-skill, high-skill, apparels, leathers, chemicals, home goods, souvenirs, or perhaps everything that are in demand by the consumers, in domestic market or more so globally. Manufacturing must embrace rural India to bring in prosperity to the millions of people there. Many entrepreneurs have come out with business models in manufacturing for rural India that must be emulated by hundreds and thousands of entrepreneurs and supported by the government and successful business leaders.

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